As the 2010s draw to a close, commentators will write and talk about the big themes of the last ten years. Expect to hear a lot about populism, big tech, China, and AI. But few, if any, will mention the rise of the private investment office as one of those themes.
That’s a mistake because the rise of the private investment office and family capital might be as significant as some of the other big themes of the last ten years. But few appreciate this development and that is short-sighted.
In terms of global capital flows, private investment offices and family capital are now encroaching on the dominance of the big pension and sovereign wealth funds.
As global pension funds have risen in value terms by around 50% in the last ten years, the rise in assets controlled by private investment offices has increased by at least 150%
It’s difficult to put a definitive number on what proportion of the global capital market private investment offices/family capital controls, but it’s a big chunk.
Family Capital has a database of over 1,000 of them, each managing on average of around $500 million. We define them as single-family, or principal-led investment office, and, although some might be drawing in money from other wealthy individuals and families, they aren’t commercial multi-family offices.
Perhaps there are another 2,000-plus of these private investment offices. Some even talk about 5,000-plus. But sticking to a total of 3,000, a rough estimate might come up with a figure of at least $1.5 trillion of assets they control. That might not seem much in terms of assets managed by sovereign wealth funds, with global pension fund assets alone controlling around $44 trillion, according to the OECD.
But the $1.5 trillion figure for offices is likely to be much more when a broader definition of family capital is taken into account.
Family Capital’s list of the top 750 family businesses in the world with total revenues of more than $9 trillion is indicative of the rise of family/private capital in global markets. More than half of these businesses are privately controlled, and many have corporate venturing arms, which are effectively quasi family investment groups, given these businesses are 100%, or close to 100%, owned by the family.
The top 750 family businesses each have revenues of at least $2 billion. If it is assumed there are at least another 2000-plus businesses privately controlled with annual revenues of between $1 billion to $2 billion, the pool of family/private capital is likely to be much more than $10 trillion.
Even that number is probably a conservative estimate – private banks and wealth managers manage trillions of dollars of private capital as well. Of course, double-counting – family enterprises keep a lot of money with wealth managers – would limit the total amount to some extent.
But perhaps what’s more important isn’t the total size of these assets, but rather their rise and the growing influence of family/private capital in global capital markets over the last ten years.
As global pension funds have risen in value terms by around 50% in the last ten years, the rise in assets controlled by private investment offices has increased by at least 150%, according to our calculations. Much of that rise has been due to a mushrooming of these groups in the last ten years.
Back in 2010, private investment offices weren’t that prominent, and a rough estimate would have placed their numbers at no more than 1,000. Today, 3000, as we have mentioned, is a conservative estimate of their numbers.
Also, their influence in capital markets has risen at a similar pace. And that phenomenon is best explained by the switch to direct investing.
Prompted mainly by the financial crisis of 2008 and its fallout, family capital, whether managed by private investment offices, or through family businesses, has invested much more directly over the last ten years.
This capital has consequently become much more influential, particularly in private equity and venture markets. Family Capital recently wrote about this in respect to the venture world, where the role of private investors pretty much dominates investment in the sector. In contrast, institutional money isn’t that influential in venture investing.
This influence in capital markets has also risen as the long-term investment thesis has gathered pace. The short-termism of shareholder value and private equity funds flipping companies took a beating from the fallout from the financial crisis. Consequently, patient capital has become much more of an investment theme over the last ten years. This has been driven by the rise of family capital, which has always tended to be less interested in short-term gain and more committed to long-term achievements.
Yet, family capital might have even been more influential in the last ten years if it had gained a bigger hold in China. For the most part, family enterprises in the world’s second-biggest economy remain hamstrung by the dominance of state capitalism in China. Family/private investment groups are even less influential. And as much as making predictions is fraught with problems; it’s difficult to see this changing over the next ten years.
But in many other parts of the world, the rise of the private investment office has been a defining factor in the world economy over the last ten years.
That rise is unlikely to slow in the next ten years. And perhaps at the end of the next decade, this phenomenon will be appreciated much more than it is at the end of the 2010s.